11-Sep-2019 : Rajratan Global Wire is a bead wire manufacturer. It is one of the largest bead wire manufacturers in Asia excluding China. Though, the bead wire accounts no more than 3% of a tyre’s retail price, it is one of the most critical technology-intensive components to go into a tyre. The bead wire plays a critical function: it holds the tyre on the rim and resists the action of inflated pressure that is constantly trying to force it off. This crucial link, through which the vehicle load is transferred through the rim to the tyre, prevents vibration during driving, enhances tyre safety and enforces tyre durability. The tyre manufacturers wants to stick to reliable vendors, who are technologically strong and time-tested. That’s why, the customer retention is quite high for Rajratan Global Wire.

When the auto segment in India is going through a rough patch, the performance of Rajratan Global Wire has been rock steady. In FY-2018-19, the company’s revenue grew 41.32% to 492.88 crores while profit after tax increased by 56.02% to Rs 26.71 crores. The company derives significant portion (around 19.15%) of its revenue from export. This is the reason, why Rajratan’s performance is far better than the industry growth. This has been further improved by cost control and various process improvement  initiatives taken by the company.

The company’s manufacturing operations are located at Pithampur Industrial Area, Indore, India and Ratchaburi, Thailand through its subsidiary Rajratan Thai Wire. Rajratan Thai wire is the only bead wire manufacturer in Thailand. In the financial year 2018-19, the Thai subsidiary has undergone a capacity expansion from 26000 TPA (Tons Per Annum) to 34800 TPA. The increased capacity has started its commercial production in the first quarter of financial year 2020. The Indian operation is also undergoing a capacity expansion from 36000 TPA to 72000 TPA. As per schedule this should come into production from the second quarter of financial year 2020.

As tyre is an essential component of any automobile, whether electric or fossil fuel, Rajratan Global Wire’s business is immune to any policy change by the Government. Moreover, having  a subsidiary in Thailand, Rajratan posses few competitive advantages. Rajratn Thai Wire is the only bead wire manufacturer in Thailand. Thailand is the source of 37% of the world’s raw rubber supply. The Thai Government has plans to increase tyre production from 530,000 tonnes per year to more than a million tonnes in the next couple of years. In India as well, there are number of tyre manufacturers, which increased capacity or announced to do the same. Multinational companies like Bridgestone committed to invest USD 304.3 million over the next five years time.

Where the demand environment looks quite attractive, company’s financial performance is quite impressive. The company has a strong balance sheet.  In FY-2018-19, the company’s revenue grew 41.32% to 492.88 crores while profit after tax increased by 56.02% to Rs 26.71 crores. There is improvement in EBIDTA margin as well. In the first quarter of financial year 2019-20, the revenue increased 6.40% and profit after tax increased by 16.87% YoY. This is a stellar performance in the backdrop of muted growth of the Auto Industry.

In valuation front as well, Rajratan has been hovering below its historical average. Its  one year trailing EPS was 64.64. Thus at Rs 785, it is having a PE ratio of 12.1,which is quite cheap. Seeing the demand oulook, past performance and capacity expansion, we set a target price of Rs 1250 in the next one year.  

Risk 1 : Prolong muted Auto segment poses a risk in our estimate.

Risk 2 : First three clients contribute around 47% of the standalone revenue.

Risk 3 : Higher steel price will negatively impact the margin.

Written by Research Analyst (SEBI Registered) Suvendu Manna

Disclaimer : The research analyst has position in the stock as on the date of writing this article.

I, Suvendu Manna, Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect my views about the subject issuer(s) or securities. We also certify that no part of my compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. 

 Other Disclosures:

This report is a view of the Research Analyst as mentioned above and not a solicitation for purchase or sale. This report is solely meant for personal use and not for circulation. The information and opinion contained herein have been compiled or arrived at, based upon information obtained in good faith from sources believed to be reliable. Such information has not been independently verified and no guarantee, representation of warranty, express or implied, is made to its accuracy, completeness or correctness.

The securities discussed and opinions expressed in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment objectives, financial positions and needs of specific recipient. This may not be taken in substitution for the exercise of independent judgment by any recipient. The recipient should independently evaluate the investment risks. The value and return on investment may vary because of changes in interest rates, foreign exchange rates or any other reason. We accept no liabilities whatsoever for any loss or damage of any kind arising out of the use of this report. Past performance is not necessarily a guide to future performance. Actual results may differ materially from those set forth in projections. Forward-looking statements are not predictions and may be subject to change without notice.

This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other Jurisdiction, where such distribution, publication, availability or use would be contrary to law.